I mentioned this briefly previously by saying you pay one more cent than the advertiser below you. In other words, if the advertiser ranked below you bids 21 cents, you pay 22 cents, assuming that is not more than your maximum bid.
This used to be the way Google calculated how much you paid. In fact, a few search engines (although they are rare) still use this Vickrey style of auction system. Google however has changed this formula and have even published it:
Cost = AdRank(b) / QS(a)
AdRank(b) is the ad rank calculation of the advertiser immediately below you. Keep in mind that the adrank calculation is their QS times their bid. QS(a) is your own quality score. So if both quality scores are the same, they cancel each other out meaning you end up paying your competitor’s bid, if it is equal or below your own bid.
So increase your QS, all other things being equal, you will reduce your costs. As QS is not related to your bid but to your CTR, the way to increase your QS is to create better ads.